Valens GroWorks is well-positioned in emerging edibles space, Mackie Research says

Strong quarterly numbers are cause for a target increase on cannabis extraction company Valens GroWorks (Valens GroWorks News, Stock Quote, Chart TSXV:VGW), according to Mackie Research analyst Greg McLeish, who on Wednesday maintained his “Buy” recommendation while upping his target price from $6.75 to $8.00, representing a projected 12-month return of 96 per cent at the time of publication.

On Tuesday, Kelowna-based Valens GroWorks reported its second quarter fiscal 2019 results for the period ended May 31, 2019, coming in with revenue of $8.8 million and adjusted EBITDA of $2.0 million.

The $8.8-million top line was above McLeish’s $5.8 million estimate, while the $2.0 million in EBITDA beat his $0.8 million forecast. He calls the results strong and says that there is no change to his thesis on the company.

“Valens has substantially increased its annual extraction capacity to 425,000 kg of dried cannabis and hemp biomass. Valens continues to experience significant demand for its services and it is accelerating its growth to ensure that it is able to meet the growing demand of its partners for both extraction and white label product development,” writes McLeish.

In other notes on the quarter, McLeish points to the net loss of $10.5 million or $0.10 per share, which was higher than forecasted and primarily attributable to higher share base compensation expense ($3.3 million compared to the analyst’s forecast of $875,000), a $3.1 million impairment charge related to an asset held for sale and a $5.9 million charge related to the termination of a consulting agreement.

The analyst says that with the impending opening up of the edibles market in Canada, he forecasts an increase in demand for derivative products, making extraction “an integral component of any licensed producer’s business plan for 2019.” Thus, McLeish contends that it would be advantageous for cultivators to partner with experienced extractors such as Valens.

The analyst has updated his forecasts, now calling for fiscal 2019 revenue and EBITDA of $39.9 million and $9.3 million, respectively, and fiscal 2020 revenue and EBITDA of $152.5 million and $77.9 million, respectively.

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